BENEFIT SIMPLIFICATION PROJECT 2004
Buy-out of transitionally protected Invalidity
1. This short note discusses buy-out for
former Invalidity Benefit cases that are currently transitionally
2. Incapacity Benefit was introduced on
13 April 1995 and replaced Sickness Benefit and Invalidity Benefit.
Customers entitled to Invalidity Benefit immediately before Incapacity
Benefit was introduced were transitionally protected and received
Transitional Long-Term Incapacity Benefit which in effect is calculated
exactly the same as Invalidity Benefit. However, it is more generous
and includes the old age-related Invalidity Allowance and continues
to be paid until the customer reaches pension age (60 for a woman
and 65 for a man) or until they are no longer incapable of work,
whichever is earlier.
3. As would be expected, transitionally
protected Invalidity Benefit customers are older and, although
they are subject to the same medical testing regime as Incapacity
Benefit customers, anecdotal evidence suggests that they are less
likely to be classified as fit for work or ready to return to
work. These customers tend to remain on benefit until they retire
and are not required to participate in any type of work focused
activity, although in Pathways to Work areas they can participate
on a voluntary basis.
4. The table below shows how the ex-Invalidity
Benefit caseload is changing. The ex-Invalidity Benefit caseload
is reduced by approximately 15,000 cases per quarter. However,
there could be customers who claimed prior to 1995 who were aged
20 and such people might continue claiming for another 40 years.
Incapacity Benefit recipients by rate of benefit,
including long term rate by ex-Invalidity Benefit and others (thousands)
|Number of Incapacity Benefit customers
|Other IBLT|| Credits only
|Source: Information Centre March 2004
5. The table below shows that there are approximately
206,000 customers who are in receipt of Income Support who are
also getting long-term Incapacity Benefit (including ex-Invalidity
Benefit cases). On average, customers who receive ex-Invalidity
Benefit are paid about £20 more per week than new Incapacity
Benefit cases. Therefore, it is likely that they would form a
much smaller proportion of the 206,000 Income Support recipients
than their share of the overall Incapacity Benefit load might
Income Support customers with income taken into account or
disregarded, by number and type of items: November 2003 (in thousands)
|Department's pensions and benefits
||Items into account (000's)
||Items disregarded (000's)
|Incapacity benefitshort term (low)
|Incapacity benefitshort term (high)
|Incapacity benefitlong term||206
|Severe Disablement Allowance||193
|Attendance Allowance||Nil (over 60)
|Disability Living Allowance care component
|Disability Living Allowance mobility component
|Source: Information Centre March 2004
Average payments of long-term Incapacity Benefit in comparison with ex-Invalidity Benefit
|Incapacity Benefit long-term rate
|Source: Information Centre March 2004
6. There are several options for the Project to consider.
Leaving those who are entitled and in receipt
of Invalidity Benefit until they retire or are no longer incapable
of work. The "do nothing" option.
Buy-out transitional protection with a lump sum
payment that would be actuarially calculated depending on age
of the client and the amount of Invalidity Benefit received and
replace with long-term Incapacity Benefit.
Freezing all amounts of Invalidity Benefit for
a fixed number of years (for example 2 years), buy-out transitional
protection and then replace all Invalidity Benefit rates with
the Long-Term rate of Incapacity Benefit.
Freeze individual rates of Invalidity Benefit
and replace with Incapacity Benefit when Incapacity Benefit rates
equalise with Invalidity Benefit, on a one by one basis. This
is a "marked time" approach to phasing out Invalidity
|1||Leaving those who are entitled and in receipt of Invalidity Benefit until they retire or are no longer incapable ofwork.
Allows the issue to gradually phase out
Continue to run two complex contributory systems side by side, requiring staff to be trained in old rules that apply to Invalidity Benefit
Continues to be unfair to the more recent claimants of Incapacity Benefit as the old Invalidity Benefit rates remain more generous than Incapacity Benefit
Disincentive to consider work as an option as rates of benefit are generous and continue to be uprated
|2||Buy-out transitional protection and replace with the higher long-term Incapacity Benefit, current the basic rate is £72.15 (excluding age additions).
Would hugely simplify the system of contributory benefits for the incapacitated
Negate the need to administer two systems at the local level
A one-off lump sum payment may enable some clients to consider a move into work and the reduction in benefit may have a work incentive effect
Equalises the disparity between the old more generous Invalidity Benefit and the new Incapacity Benefit ratescould be considered a fairer system
Costly (£2.5 bn)
Some customers might become entitled to Income Support top-up.
May be difficult presentational issues. These customers had been promised ongoing protection so will not expect their entitlement to Invalidity Benefit to change
Possible European Convention of Human Rights issues to be explored.
May influence negative behaviour ie those whose partners work part-time may choose to stop working so as to claim Incapacity Benefit/Income Support where entitlement may newly arise with a reduction of Invalidity Benefit
|3||Freezing all the amounts of Invalidity Benefit for x years (eg 2 years), and then buy out all clients and replace all Invalidity Benefit clients with the Long-Term rate of Incapacity Benefit
This is a more traditional way of treating transitionally protected cases so customers may be more used to this type of approach
Would simplify system after 2 years
Would give customers a specific time to adjust and come to terms with the change
Less costly than option 2
The complexities would remain for a further 2 years
Possible European Convention of Human Rights issues? Loss in real terms for those with frozen Invalidity Benefit
Could float people onto Income Support.
|4||Freezing individual rates of Invalidity Benefit and replacing with Incapacity Benefit when Incapacity Benefit rates equalise with Invalidity Benefit, on a one by one basis.
This is the most traditional way of treating transitionally protected cases
Might be presentationally difficult as customers with Transitional Protection might feel that they were being cheated of their uprated additional pension, (ie a legal possession)
Would take a long time to convert the entire caseload and would involve a high level of clerical involvement ie each case would need to be assessed on an individual basis
Losers in real terms
7. There are 5 elements to the difference between Invalidity
Benefit and Incapacity Benefit. They are as follows:
(i) The Basic RateThis is identical for
Invalidity Benefit and Incapacity Benefit, so nothing needs changing.
(ii) Additional PensionThose on Incapacity
Benefit have no Additional Pension. For those on Invalidity Benefit,
the Additional Pension has been frozen. Over the life time of
the benefit expenditure will be around £2.3 billion.
(iii) Child Dependency Increases (£11.35
pw)These are the same in Invalidity Benefit, as they are
on Incapacity Benefit. They are equivalent to the Child Tax Credit
(but slightly largerChild Tax Credit is £10.45). If
the Child Dependency Increase is frozen, then the Child Tax Credit
would reach the Child Dependency Increase level in about 5 years
and then you can force everyone to move to Child Tax Credit at
no extra cost to us or loss to customers. Currently, new Incapacity
Benefit customers have to go straight to Child Tax Credit.
(iv) Adult Dependency Additions (£30-£40
ish per week)If we individualise the benefit system, this
will get lost anyway. This has not been costed as the figures
are the same for Invalidity Benefit and Incapacity Benefit.
(v) Age AdditionsAt 3 rates for Invalidity
Benefit, and 2 rates for Incapacity Benefit. The difference between
the two costs around £16m this year. Difference until 2030
adds to around £150 million.
8. Work has already been done by the Tax Credit team
on costings for abolishing all Child Dependency Increases in all
benefits. However, in Incapacity Benefit/ Invalidity Benefit this
would cost around £550 million projected forward to 2030
(if current trend continues). However, everyone could be transferred
to Child Tax Credits when they reach the same level. In this case,
only the 5-year costs would need to be considered which comes
to around £260 million. Buying out Adult Dependency Increases
has not been costed but would be small compared to other elements.
|2||Buy-out transitional protection with a lump sum payment that would be actuarially calculated depending on age and the amount of Invalidity Benefit received and replace with long-term Incapacity Benefit
||2.5 bn||£2.5 bn = £2.3bn (additional pension) + up to £150m (age addition) + (Adult dependency Increases, Child Dependency Increases). This is equivalent to an average one-off payment of £5,000 to each Invalidity Benefit customer
|3||Freezing all amounts of Invalidity Benefit for a fixed number of years (for example 2 years). After the 2 years buy-out the Invalidity Benefit with a lump sum payment and replace all Invalidity Benefit rates with the Long-Term rate of Incapacity Benefit.
||1.7 bn||This will result in an average one-off payment of £4,000 after 2 years
|4||Freeze individual rates of Invalidity Benefit and replace with Incapacity Benefit when I Incapacity Benefit rates equalise with Invalidity Benefit, on a one by one basis. This is a "marked time" approach to phasing out Invalidity Benefit
|Source: Information Centre & BFMD forecasts (with adjustments)
1. 492,200 Invalidity Benefit customers affected
2. We have calculated future additional expenditure on
Invalidity Benefit cases (as opposed to if individuals were on
Incapacity Benefit) as: Expenditure = (difference in average amount)
x (average number of years) x (Invalidity Benefit caseload). We
have used projected forecasts (with some adjustments made by Bella)
of additional pension alone in ex-Invalidity Benefit for the next
10 years, reaching a figure of £2.1 billion.
3. Some costings are not currently consistent with other
costings which take other factors into account (ie: Income Support
Family Employment Division
How many people work in the Benefit Simplification Unit?
The Unit has a complement of 4 staff, one Senior
Executive Officer and three Higher Executive Officers.
It is supported by some additional input from
a Senior Civil Servant and a Grade 7.
A secondee from the Citizens Advice Bureau also
worked on the Unit from June 2006 to March 2007.
The five staff mentioned in the June 2006 PQ included the
secondee from Citizens Advice.
What are the running costs of the Benefit Simplification Unit?
There were no specific set up costs as permanent
staff were drawn from within the Department.
Total running costs from when the Unit was set
up in January 2006 until the end of the last financial year at
March 2007 were £348,735.